Microsoft last week continued to sketch out its emerging software-as-a-service strategy. In speech after speech at the company's annual meeting with financial analysts, Microsoft executives discussed the company's high-priority shift from a heavy reliance on shrink-wrapped software.

"From my viewpoint, every one of our software offerings is either a socket for a new attached service or an upgrade or up-sell opportunity to extend a product's value proposition up to the Web and potentially through to mobile devices," said chief software architect Ray Ozzie.

Microsoft CEOSteve BallmerThrowing talent, resources, money at the ad business

Microsoft's online architecture starts with a "foundation services" layer that includes the data centers from which its Web services run. The number of servers in Microsoft's services infrastructure has more than doubled in the last year, according to Ozzie. A new data center will break ground this week in San Antonio.

At the next level are "cloud infrastructure services," which Ozzie described as a kind of "utility computing fabric" of virtualized services, application frameworks, management infrastructure, storage, and network services. Microsoft expects to offer those capabilities to developers and to enterprise customers over time, Ozzie said.

The other layers in Microsoft's services model include "Live platform services" (identity and presence services, for example) that have an online advertising infrastructure, and applications such as CRM.

Microsoft will give Web-based "click-to-run capabilities" to Windows applications, CEO Steve Ballmer said. Jeff Raikes, president of Microsoft's business division, added that there's a place online for "traditional office productivity," though he didn't say whether that meant Web versions of Office apps or lesser collaborative document editing and sharing capabilities.

Microsoft will extend its software offerings with "connected productivity scenarios" that might include document sharing, note taking, meetings, and universal access on the Web and mobile devices, Ozzie said. For line-of-business employees, CRM, lightweight ERP, and "issue-tracking solutions" may be in store.

Microsoft has been investing heavily in its advertising platform, including the $6 billion it's spending to acquire aQuantive. Last week, it disclosed plans to buy AdECN, an ad exchange that Microsoft officials likened to a stock exchange where ads are auctioned off to advertising networks that are exchange members. Yahoo bought an ad exchange, Right Media, earlier this year.

'HELL-BENT' ON SUCCESS
"We are hell-bent and determined to allocate the talent, the resources, the money, the innovation to absolutely become a powerhouse in the ad business," said Ballmer. "This is essential if our software-plus-services vision is going to come to fruition." And there was progress to report: Microsoft last week revealed deals to serve advertisements to visitors to social news site Digg and in-game advertising for five EA Sports video games.

As part of that effort to innovate and gain market position, Microsoft said it has formed an applied research group called the Internet Services Research Center to accelerate the development and deployment of Microsoft advertising technologies. The group will be headed by VP Harry Shum, formerly chief scientist for the company's search and advertising platform group under senior VP Satya Nadella.

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